In a case reversing a $399 million damages award to Apple, the U.S. Supreme Court has held unanimously that an “article of manufacture” under the design patent damages statute can be anything from an entire product to a single component of a multi-component product. The decision made clear that the damages award for infringement of a design patent covering a single component article of manufacture should be less than the entire profit on the multi-component product. The Court left open the question of how the lost profits for a single component of a multi-component product should be determined.

Summary

Petitioner Samsung Electronics Co., Ltd. (Samsung) sells smartphones that compete with Respondent Apple Inc. (Apple) iPhones. Over the course of many years of contentious litigation, the parties have litigated numerous intellectual property claims, including trade dress infringement, design patent infringement and utility patent infringement. On appeal, the U.S. Court of Appeals for the Federal Circuit upheld a jury verdict of design patent infringement and a damages award of more than $399 million, which constituted all of Samsung’s profits from the infringing phones. On appeal, the Supreme Court granted certiorari on this question:

Whether, where a design patent is applied to only a component of a product, an award of infringer’s profits should be limited to those profits attributable to the component?

The grant of certiorari was itself noteworthy, because the last time the Supreme Court decided a design patent case was nearly 120 years ago. More noteworthy, however, is the Court’s answer to the question. In a unanimous decision, the Supreme Court determined that an “article of manufacture” under 35 U.S.C. § 289—the design patent remedies statute—need not be an entire product and can, instead, be a single component of a multi-component product. Samsung Elecs. Co. v. Apple Inc., No. 15-777, 580 U.S. __, slip op. at 6 (2016). The Court further found that in such cases, the damages award should not be based on the entire product, but rather on the profit from a component of the end product. Id. at 5.

Background

At trial, Samsung was found to infringe three design patents, covering the following ornamental designs:

Whoever during the term of a patent for a design, without license of the owner, (1) applies the patented design, or any colorable imitation thereof, to any article of manufacture for the purpose of sale, or (2) sells or exposes for sale any article of manufacture to which such design or colorable imitation has been applied shall be liable to the owner to the extent of his total profit, but not less than $250, recoverable in any United States district court having jurisdiction of the parties.

On appeal to the Federal Circuit, Samsung argued that the profits should have been limited to those for the infringing “article of manufacture,” and not the entire product. Apple Inc. v. Samsung Electronics Co., Ltd., 786 F.3d 983, 1002 (Fed. Cir. 2015). In support of its position, Samsung cited Bush & Lane Piano Co. v. Becker Bros., 222 F. 902, 903 (2d. Cir. 1915), where the Second Circuit awarded damages limited to sale of the external piano, and not on the internal piano parts, which were sold separately. Id. The Court rejected this argument on the basis that, unlike Bush & Lane, the “innards of Samsung’s smartphones were not sold separately from their shells as distinct articles of manufacture to ordinary purchasers.” Id.

The Supreme Court Decision

The Supreme Court, in an opinion by Justice Sonia Sotomayor, found that the proper interpretation of the statute was critically linked to defining the term “article of manufacture.” In concluding that “[t]he term ‘article of manufacture,’ as used in §289, encompasses both a product sold to a consumer and a component of that product,” the Court evaluated the scope of the dictionary definition of the term, the use of the same phrase in 35 U.S.C. § 171(a), and the term “manufacture” in 35 U.S.C. § 101, and found that a broad construction was appropriate.

The Court, however, declined to determine what the “article of manufacture” was in the present case, and further declined to set out a test for identifying the relevant article of manufacture, instead delegating this analysis to the Federal Circuit.

The Test for Determining an “Article of Manufacture”

Although the Supreme Court left this issue open, the oral argument in this case provides a preview of the positions that may be argued before the Federal Circuit.

At oral argument, Samsung argued that there should be a two-part test:

(1) Determine the article of manufacture based on:

(a) The design claimed in the patent; and

(b) The accused product design.

(2) Determine the quantum of damages from that article of manufacture using the following tools:

(a) Ordinary Accounting to look at the cost of goods sold in relation to revenues for the relevant component (for example, if the company buys the component from an OEM, you would look at their profit margin and apply that);

(b) Consumer Demand Evidence provided via consumer survey; and

(c) Total Profits where the patentee may attempt to show that the bulk of the profits come from the article of manufacture at issue.

(Trans. of Oct. 11, 2016 Arg. at 16:14-18; 20:9-10; 9:15-24; 10:25-11:23). Samsung further took the position that the burden of proving what constitutes the article of manufacture is on the plaintiff; both the government and Apple disagreed. Specifically, Samsung argued that “[t]he burden is on the plaintiff to show damages. And subsidiary questions subsumed in what the damages are are also always the plaintiff’s burden, as the entire market value rule in the Federal Circuit shows.” (Trans. of Oct. 11, 2016 Arg. at 56:16-20).

The United States, which was granted an appearance for leave to participate in the oral argument as amicus curiae, suggested a more complex test to determine the article of manufacture, but provided less insight regarding the damages determination:

(1) What is the relevant article?

(a) Compare the scope of the patented design shown in the drawings of the patent;

(b) Evaluate how prominently that design features in the accused article;

(c) Determine whether there are other conceptually distinct innovations or components in the article that are not part of or associated with the patented design; and

(d) Evaluate the physical relationship between the patented design and the rest of the article.

(2) How much of the total profits from the device are attributable to the infringing article?

(Trans. of Oct. 11, 2016 Arg. at 22:7-13; 28:13-20).

At oral argument, Apple did not advance its own theory, but did endorse the Solicitor General’s four-part test for identifying the relevant article of manufacture. (Trans. of Oct. 11, 2016 Arg. at 39:3-5). In practice, the tests articulated by Samsung and the United States are not inconsistent with one another; they merely depart from one another at the level of specificity each suggests for determining the article of manufacture and analyzing the proper award of damages. Thus, it is likely that the test the Federal Circuit ultimately arrives at will closely resemble these proposed analyses.

Regardless of the test that is ultimately delineated by the Federal Circuit, the present decision will have effects—both positive and negative—on industry. Some with design patents may find themselves limited in their recovery for infringement and may find that competitors are less incentivized to avoid infringing if they think the damages for infringing may be nominal. On the flip side, however, companies bear less risk that they could be forced to lose all of their profits on a product due to a design patent covering only an insignificant feature of the product.

That the Supreme Court’s ruling will have varying effects on different industries and companies within industries is nowhere more evident than in the relatively even split of the roughly 25 amicus briefs received on this issue, including several briefs in support of neither party. Those favoring the petitioner, Samsung, included companies focused on multi-component functional products, such as Dell, Inc., whereas those in support of the respondent, Apple, included companies selling apparel and accessories with more of a design focus, such as Crocs, Inc. and Tiffany and Company.

Going forward, a party seeking design patent protection for its products should consider filing multiple design patent applications, ranging from applications that seek the broadest protection possible, to those covering smaller design elements. This approach may allow the patent owners to maximize the scope of available damages, while also pursuing infringers with discrete but important portions of their protected designs.